Why ONE Single-Family Rental Property Won’t Get You To Retirement…

It feels pretty good when my friends and associates tell me they’re investing in real estate.

In fact, I get really excited for them, because this is the only way I know of that lets people get out of the rat race, walk away from the 9-to-5 grind and have a fabulous retirement.

But then I get a little less happy for them when I learn how they are doing their deals, because they aren’t investing in ways that will bring them greater returns with less stress.

Let me back up…

About a year ago a friend put $150,000 into buying a single-family rental property. He and his wife decided they wanted to generate a little extra income every month with real estate, and they found a fixer-upper. It didn’t need too much work, but they still ended up putting around $10,000 into it to bring it up to date and make it more appealing as a rental.

Today they earn $175 per month by renting that property to a family. This amount translates to $2,100 per year in extra (passive) income. That’s okay, but if you do the math, it’s just 1.31% ROI (return on investment).

Not great. Especially when using a different strategy could bring three, four or five times the returns. (For the same investment of $160,000.)

Here’s the formula:

$2,100/year (passive income) divided by $160,000 (investment) = 1.31%

I’ll explain in more detail about why buying a single-family property as an investment isn’t going to get you to your retirement goals in a minute. If you want to jump right in, watch this short video:

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First Steps Are Just That…

Before I launch into this topic further, I need to take a minute to applaud my friend for taking his first bold step into real estate investing. As with us all, the first steps are just to get our feet wet. Then hopefully we learn from our decisions, adjust our course and make more profitable decisions the next time around.

In this case, it’s not too late.

If the property has any equity in it, my friend could always sell it and use the gains to put down on something that would earn a whole lot more passive income for his family. If he ever wants to sit down with me to discuss how this might happen, I’d be happy to talk to him. Right now I want him to learn about being a landlord and why he might not want to repeat the path he just took.

In watching this wonderful man and others who have made similar choices, thinking that this investment would help get them to retirement faster, I realized there are three lessons that I could share to save you from taking the longer path.

Lesson 1 – In the case with my friend, his decision actually compliments his lifestyle. While not a whole lot of income is being generated each month, there is enough to add to the quality of his family’s life. He can pay more bills, buy more dinners out more often and even buy plenty of doo-dads (that’s what the unnecessary things we all buy in life are called in the Cashflow 101 board game… like TVs, new clothes, the hottest new gadgets, etc.). But that won’t get him to his goals, so I’m hoping he puts the extra income away so he can invest it down the road in strategies that will bring more cashflow into his life.

Lesson 2 – My friend actually bought himself a J – O – B! That’s right. I said it. He is now a landlord, which comes with property management duties, which means dealing with termites, tenants and toilets. He already has a 9-to-5 job, so that’s a lot of added hours and stress. What if he would have invested instead in a property that someone else is already managing and he could get higher returns than the 1.31% he sees now? I’m betting he will the next time he has a fair amount of money to put into a property or deal.

Lesson 3 – This is not a scalable investment strategy. Well, it is… but it will take a really, really long time to scale to the point where one could retire from his/her job and live well. Let’s say, for example, my friend buys another single-family property next year or more realistically the year after. Then he would have two properties, each generating about $175 per month. That’s $350 a month total or $4,200 in extra income annually. He can’t leave his job yet or for a long time to come, right?

Let’s say you are taking the same course of action. To scale this model up to a point where you can retire (which means the passive income your properties generate has to be higher than your monthly expenses)… how many single-family properties would you have to purchase to rent out? Twenty? Thirty? That’s a whole lot of money you’ll be investing, and banks typically won’t loan to you beyond a certain number of properties.

What’s Your Next Step?

If you are thinking about your retirement, that’s great! We all should be doing that, and we should start a lot younger than many of us tend to. But when you do, and you think real estate investing will get you there… you’d be correct, but not with the strategy of buying just one single-family residence at a time.

That’s what I discovered a few years ago and that’s why I only invest in multifamily properties. (Right now I’m looking at apartment buildings with 50+ units.)

If you do the math, you’ll find the answer to which path you should take. For example, let’s say instead of earning $175 for the ONE unit you could earn $175 per door X 50 units. What is the monthly income then? I’ll save you the calculation. It’s $8,750 PER MONTH.

If you participate in someone else’s deal, you would get a percentage of that amount, but it’s WAY more than just $175 a month or 1.31% ROI. Plus you don’t have to worry about property management. That’s in place already. You don’t have to worry about anything except collecting your checks from the investor with whom you participate.

If you’re serious about putting more gold into your golden years, I invite you to read this article again, do a bit of math on your own and then give me a call. I can answer your questions and fill in the blanks.

Oh, and if you happen to be in my geographic area, why not join me for an upcoming Cashflow game? I host them every couple of weeks as time allows. It’s a great way to learn about real estate investing, working with partners to get bigger deals done and earning greater cashflow as a result… and it’s a whole lot of fun!